Managing Growth In A Volatile Market

Editor’s note:Glenn Solomon is a Partner with GGV Capital. Some of his recent investments include Pandora, Successfactors, Nimble Storage, Isilon, Domo, Square, Zendesk, Quinstreet and AlienVault. His personal blog,goinglongblog.com, focuses on growth-stage entrepreneurs who are thinking big.

Over the past several years, founders have been operating in a steadily improving macroeconomic environment. Stock market performance has mirrored the economic recovery, with the tech-heavy NASDAQ having posted meaningful gains in four of the past five years and only 2011 posting a modest 1.8 percent loss. Leveraging this economic and stock market performance, venture capital firms have raised increasingly more capital and have begun to invest larger amounts in emerging private companies at growing valuations, moving rapidly to do so.

However, high-growth tech stock performance over the past 6-8 weeks has put a huge dent in the euphoria that was beginning to emerge in venture capital land. Since early March, star performers have been shellacked, wiping out gains and compressing valuation multiples in the process – as examples, shares of , , and are all down between 20 percent to 50 percent.

This type of prolonged volatility affects public investors, but it will also impact VCs, founders, executives and employees of private startup and growth companies. In a stable market, the rules of the game are well-understood – the milestones needed for future financings and the valuation metrics and IPO timing are all predictable. This isn’t to say things are easy, but they’re not full of surprises. All of this changes when volatility in the markets increases dramatically, calling preconceived notions into the question. Things can get erratic and unpredictable, making life tough for even the most experienced founders.

If the markets go into a prolonged period of volatility, founders at all levels should prepare for a new type of playing field. There are three key areas of focus for a founder in a world with volatile capital markets:

Runway

Battening down the hatches

Shopping lists

Runway

The venture capital market generally moves one to two quarters behind the broader equity markets, especially in a downturn. During the past two big moves down in the NASDAQ, the Internet bubble pop of 2000-2001 and the global recession of 2008-2009 were both closely followed by sizable declines in venture funding. Therefore, founders should not expect venture capital to be as easy to raise or in plentiful supply if the macroeconomic volatility continues or escalates.

In the context of venture capital, founders have a maximum one to two quarters of leeway to raise a bigger round, even if dilution is larger than desired, to prepare for a long winter. It’s critical that founders have a plan to live off of this round indefinitely. If the market swoons, switching the company to a self-sustaining plan, where outside capital is no longer needed, could prove a life saver.

Batten Down the Hatches

As a founder, very few people, if any, are as passionate about your company and mission as you are. Employees, customers, and partners usually gain more appetite for risk in a stable or rising market. However, in highly volatile markets, this appetite for risks often abates, and these groups can grow more fearful. Therefore, a founder should prepare for such a scenario by explaining to colleagues that everyone is on a long journey together.

Everyone should be reminded that big success stories from the past typically experienced big bumps on their paths. Founders and executive teams can also put plans in place to soothe customer concerns and closely monitor those whose own livelihoods may come into question in a tough market. Same goes for key partners. In rocky seas, founders cannot afford to lose key parts of their ship or best crew members.

Prepare a Shopping List

In a tough market, many of those who haven’t planned suffer wounds. This provides others, especially those who are prepared and who hold full coffers, with an opportunity – M&A. In this scenario, prepared founders should have a shopping list of companies they’d like to acquire and be ready to pounce at an opportunity to make an attractive deal. Additionally, founders should keep similar lists of potential employees they’d like to recruit or poach out of other companies, and similarly should track potential customers and partners who may have been previously unavailable, as they may come back into play.

Volatility can be a scary thing, but as a founder, if you prepare by giving your company more runway, securing key assets, and readying an offensive playbook when others around you are paralyzed or weakened by fear, you could be in a position to make the most out of an uncertain situation.